TIPS: Rates & Terms

The principal of Treasury Inflation-Protected Securities, also called TIPS, is adjusted according to the Consumer Price Index. With a rise in the index, or inflation, the principal increases. With a fall in the index, or deflation, the principal decreases.

Interest and Principal

TIPS pay interest every six months. The interest rate is a fixed rate determined at auction. Though the rate is fixed, interest payments vary because the rate is applied to the adjusted principal. Specifically, the amount of each interest payment is determined by multiplying the adjusted principal by one-half the interest rate.

When TIPS mature, we pay either the adjusted principal or the original principal, whichever is greater.

The following chart shows an example of how the principal and interest for a TIPS issued in 1999 increased over time until maturity:

Viewing this chart requires your browser have Javascript enabled. Raw data for the chart in XML format is available.

Notes: Inflation adjustment to the principal is cumulative.
Annual interest is equal to sum of the two semi-annual interest payments. Cumulative interest payments for 10 years = $447.43.

Terms and Price

TIPS are issued in terms of 5, 10, and 30 years, and are offered in multiples
of $100.

The price and interest rate of a TIPS are determined at auction. The price may be greater than, less than, or equal to the TIPS' par amount. (See rates in recent auctions.)

The price of a fixed rate security depends on its yield to maturity and the interest rate. If the yield to maturity (YTM) is greater than the interest rate, the price will be less than par value; if the YTM is equal to the interest rate, the price will be equal to par; if the YTM is less than the interest rate, the price will be greater than par.

Here are some hypothetical examples of these conditions:

Condition

Type of Security

Yield at Auction

Interest Coupon Rate

Price

Explanation

Discount (price below par)

10-year TIPS Issue Date: 8/15/2005

4.35%

4.25%

99.196069

Below par price required to equate to 4.35% yield

Premium (price above par)

10-year TIPS reopening* Issue Date: 9/15/2005

3.99%

4.25%

102.106357
(price not adjusted for changes in the CPI)

Above par price required to equate to 3.99% yield

When you buy a TIPS, you are charged accrued interest, which is the interest the security earned in the current semiannual interest period before you took possession of the security. We pay the accrued interest back to you as part of your next semiannual interest payment.

A TIPS accrues interest from the 15th of the month and is issued on the last business day of the month. For an original issue TIPS, accrued interest is payable by the investor from the 15th until the issue date. For a reopened TIPS, accrued interest is payable from the dated date on the announcement until the issue date of the reopening.

If you buy a TIPS directly from us and pay by automatic withdrawal, we withdraw the accrued interest and price.

If you are a TreasuryDirect customer, you should look at your Current Holdings, Pending Transactions Detail, after 5 pm Eastern Time on auction day and check the price per $100 and accrued interest to determine the total price of the security. Next, make sure the source of funds you selected has sufficient funds to cover the total price. If you need to add funds to cover the purchase price, you have to do so before the issue date of the security.

If you buy from a bank or broker, please consult the bank or broker to learn payment arrangements.

Options at Maturity – and Before

You can hold a TIPS until it matures or sell it before it matures.

If you don't sell, your options at maturity depend on where you hold the TIPS:

TreasuryDirect. Redeem the TIPS. (The current auction schedule doesn't allow for the reinvestment of TIPS in TreasuryDirect.)

Legacy Treasury Direct. Redeem the TIPS. (TIPS cannot be reinvested in Legacy Treasury Direct, which is being phased out.)

Bank or Broker. For your options, consult your bank or broker.

Auction Pattern

5-year TIPS - April, August*, December*

10-year TIPS - January, March*, May*, July, September*, November*

30-year TIPS - February, June*, October*

* This is a reopening. In a reopening, we sell an additional amount of a previously issued security. The reopened security has the same maturity date and interest rate as the original security. However, as compared to the original security, the reopened security has a different issue date and usually a different purchase price.